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China's Pledge for U.S. Soy Buying Catches Traders Off Guard

(Bloomberg) -- China’s pledge to buy more American soybeans caught some of the world’s largest agricultural commodity traders off guard.

The same week President Donald Trump said trade talks between the top two economies involved buying "a lot of corn," Agriculture Secretary Sonny Perdue announced late Friday that China had agreed to buying an additional 10 million metric tons of soybeans, a move he said signaled "good faith."

Traders had been expecting purchases of corn as well as ethanol and distillers dried grains, a byproduct of biofuel production that’s used in animal feed. In fact, China’s state grain stockpiler Sinograin was Thursday in the market agreeing to contract terms for potential corn purchases, according to people familiar with the matter who asked not to be identified because the information is private.

The market had been on the lookout for “rumors of corn business being done,” said Matt Janney, a trader at Futures International, a brokerage firm in Chicago. The soybean news is a bit surprising, he said.

Perdue made the announcement on his Twitter account, beating a statement by the U.S. Department of Agriculture. The new purchases would come on top of two rounds of buying following the 90-day truce to the trade war. While U.S. government data shows sales of at least 6.9 million tons, people familiar with the deals say Cofco Corp. and Sinograin bought about 10 million tons.

China is proposing that it could buy an additional $30 billion a year of U.S. agricultural products including soybeans, corn and wheat as part of a possible trade deal being negotiated by the two countries, people with knowledge of the plan said this week. The two nations agreed to extend the current round of trade discussions into the weekend as negotiations in Washington yielded progress on currency policy but stopped short of a breakthrough.

While Sinograin was agreeing to contract terms so it could purchase corn in the event of a trade deal being reached, people familiar with the matter said the Chinese company wouldn’t buy before then. Before Perdue’s announcement, Chinese buyers were also making inquiries to some major U.S. ethanol producers about possible purchases, people familiar with the matter said.

China could make money buying American corn at ports in the Gulf, sending it across to the Pacific to blend it with lower-quality grain in state reserves and selling the blend at auction, according to brokers INTL FCStone Inc.

"If China buys a significant amount of U.S. corn, this can keep things a bit tighter versus what we have in the soy market," Matt Ammermann, a commodity risk manager at FCStone, said in a report.

Mark Schultz, chief market analyst at Minneapolis-based brokerage Northstar Commodity Investment Co., echoed comments that traders had been bracing for announcements around other commodities, like corn.

Still, the soybean pledge is "a big number any way you want to cut it,” Schultz said. “That’s a bigger deal than I would’ve expected."